Everyone raved about how brilliant CEO Reed Hastings was, how Netflix was disrupting the television business, and how Netflix stock was going straight to the moon.

And in mid-July, on the back of all this euphoria, the stock hit an all-time high of ~$300 a share.

And now, three months later, the stock is trading at $75, down 75%.

Ouch.

Not surprisingly, analysts are slamming the barn door after the horse is gone, frantically slashing price targets and downgrading the stock. Everyone's piling on and raving about how stupid the company is. And suddenly sobered-up analysts are saying there's still more downside ahead.

And maybe there is.

Maybe Netflix will just keep right on collapsing until it hits zero.

But maybe, just maybe, the collapse and backlash is already overdone.

Here are some points in favor of that latter view.

Netflix appears to be just going through a product transition. Product transitions are often hell on margins and stock prices. But Netflix's product transition is not about some new, future product that no one knows much about. Netflix's new product, streaming, is already off to a very encouraging start. And it's also, obviously, the future of content distribution.

It's not Reed Hastings' fault all those magazines put him on their covers a couple of years ago. This is always a death-curse, and Reed is only the latest executive to get clobbered by it. But the good ones pick themselves up and climb back to the top. (Remember 1999, when Jeff Bezos was named "Man of the Year"? Oof. But look at Jeff now.)

Netflix's streaming business, its future, is already at a ~$2 billion revenue run-rate, with 21 million subscribers paying $8/month. This shows that consumers are excited about Netflix's streaming product. The company isn't betting itself on some future product that everyone might hate.

At $75 a share, Netflix's market cap is $4 billion, or 2X the revenue of its product of the future. Assuming one values the DVD business at zero — and it's worth more than zero — this suggests that the market is valuing Netflix's streaming business at 2X run-rate revenue. That seems like a pretty low valuation for a company and product that should have good growth prospects going forward.

Netflix's streaming business, after all, is similar to HBO's business in many key ways: Like HBO, Netflix offers consumers a wide selection of on-demand content for about $10-$15 a month (HBO often costs more, depending on your cable system). Like Netflix, HBO started out with second-run movies, and then eventually began developing its own proprietary content (it seems reasonable to assume that Netflix will increase its commitment to this). Like Netflix, HBO has amassed 20+ million U.S. subscribers: HBO had about 28 million earlier this year, Netflix has 21 million (streaming). Like Netflix, HBO has a multi-billion dollar business: HBO generated about $3.5 billion in revenue in 2010, according to one estimate; Netflix's streaming business is already generating $2 billion of run-rate revenue.

Netflix may well prove to be a much better business than HBO, because it won't be beholden to the cable operators for distribution. Netflix can sell a subscription to anyone with an Internet connection — and it can sell it directly, with its own pricing and customer relationship. HBO can only sell a subscription through a cable or satellite provider, and the cable or satellite provider generally controls the relationship. Netflix, meanwhile, is becoming easier and easier to use on TV sets, which is where HBO lives. Consumers love ease-of-use and convenience, and the fact that Netflix has amassed 21 million subscribers while being relatively hard to use with a TV is remarkable.

To believe that Netflix is worth less than 2X the current revenue of its streaming business, you have to believe that content providers will always be able to sock it to Netflix whenever Netflix posts a few dollars of profit. But this doesn't seem a reasonable assumption. Netflix can already write content providers massive checks that content providers can't get from anyone else in the streaming business. The content providers all believe Netflix needs their content, but it doesn't need it — all it needs is some content. Some content providers should always be willing to take Netflix's money, especially as its subscriber base increases. And Netflix's leverage will likely increase as the company develops more proprietary content and becomes even less dependent on any one content provider.

Right now, everyone has concluded that Reed Hastings is obviously a bonehead. Reed Hastings blew it by raising prices on the DVD business. Reed Hastings blew it by hatching a plan to separate the DVD and streaming businesses. Reed Hastings blew it by failing to foresee how pissed-off his customers would get and how much his content costs would skyrocket. And so on.

But, three months ago, let us recall, everyone thought exactly the opposite: They thought Reed Hastings was a genius.

And one of the reasons everyone thought Reed Hastings was a genius, by the way, was Reed Hastings' demonstrated willingness and ability to suffer short-term pain in exchange for presumed long-term gain.

How did everyone learn that about Reed Hastings?

They learned that back in early 2004, when Reed Hastings slashed Netflix's prices and ramped up marketing spending to compete with a new DVD service from Blockbuster that many people thought was going to destroy Netflix.

Reed Hastings' price cuts and spending increases did not go over well with Netflix's shareholders. In fact, as you can see in the chart below, Netflix's stock fell even more then than it has now: 75%+

But Reed Hastings was right. The company that was supposed to kill him, Blockbuster, went bust. And Netflix's stock went on to soar 30X from the 2005 low.

Now, thanks to the stumbles of the past few months, everyone thinks Reed Hastings is a bonehead again.

And maybe, this time, Reed Hastings will turn out to be a bonehead.

But this observer, anyway, is not going to be betting against him. Especially because Reed Hastings has already demonstrated his ability to bet the company and be right. And because Netflix's future — streaming over the Internet instead of cable networks — already looks to be a pretty good and pretty big business.

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The Board Room

Editors' Picks

Henry - I was bearish for a long time, and while I don't necessarily think NFLX is a good short at these levels, I would be very cautious about entering a long position. I always thought their share repurchases (particularly over the last year or two) were extremely poor decisions, but now that they admit they're going to lose money on certain future endeavors and STILL spent $40 MM in Q3 repurchasing shares (at an avg cost of $218) means they're either criminal or stupid.

Stocks do ultimately trade on expectations of future free cash flow - do enough digging on NFLX and you'll realize they've never been a cash cow. What little cash they did generate went to help offset the ongoing dilution of employee and insider stock exercises and sales.

Netflix is wildly overpaying for streaming rights. They just paid a BILLION dollars for the rights to stream old TV episodes from the CW network. Granted, some people want to see those shows, and the streaming rights have a certain value.

But a BILLION dollars? For re-runs of "Supernatural"? Really?

Netflix is a classic example of a new-media internet darling that gets great press for a while, becomes convinced it's bulletproof, and then spends money like sailors on leave. Its starry-eyed CEO has forgotten that value counts. Next stop, bankruptcy.

Henry, with all due respect, I suggest you take a bigger picture look at this company:
1. CFO resigns suddenly in late 2011
2. Hastings has been selling every share he owns all year while also having the company conduct share buybacks in the open market.
3. The way they account for expenses (content) is questionable, at best.
4. Off balance sheet liabilities are skyrocketing (content cost)
5. Apple, Amazon, Google, etc are hot on the trail of the streaming market, with tons of cash.
6. Conference calls to report results are scripted. Yesterday's call as the first time they allowed live questions and they only allowed one.
7. Domestic subscriber base is falling (churn is brutal) and they are looking to international to salvage numbers. Very questionable if market outside US, besides highly developed areas has the internet speed capabilities to stream cleanly.
8. They are losing first rate content and overpaying for TV reruns and the few top flight movies they can secure.
9. The company itself is projecting losses in Q1 and Q2 2012, but "analysts" still have earnings at 6.19 as the mean estimate? How much are these guys being paid to "analyze"? How the hell are they going to make $6.19 a share?
10. They revised guidance on 9/15 and then came in dramatically worse than that on 9/30! In two weeks, they lost even more than they expected. They have no clue what is happening to their business.

I can't prove it and I haven't stayed close enough to this but I sense two key underlying problems.

1) This product is not fundamentally a neccessity or loved that much by customers. It's OK. It was cool. It clicked, but as you said the churn is awful and I sense it is eating away at the company.

2) The TV conteent and distributrion oligarchy hates disruption. Hates it and they don't want anyone else in the game and have the power to keep you out. I think you nailed it. The reason they paid so much for shitty cocntent is becausee they HAD to.

This thing is in trouble. If you want to play a counter trend bounce be my guest but it is more than likley a dead cat.